• From our recent company visit to Hong Leong Bank, we understand deposit competition in the market has been more intense in the recent months although not as aggressive as the previous year. Nevertheless, the competition pressure on deposit rates is expected to be milder in the near term moving forward. This is due to the delay in the implementation of net stable funding ratio (NSFR) to no earlier than 1 January 2019. We expect this to ease the pressure on funding cost as banks are not expected to compete for sticky and longer term deposits aggressively with the delay in the implementation.

• It is expected that banks, with the financial year ending December and implementing MFRS 9 on 1 January 2018, to raise pricing for loans to compensate for the higher provisions required under the new accounting standard. This will be in line with the practice on risk-based pricing that has been widely adopted by banks. We understand that repricing of loans has yet to be seen in the market ahead of the adoption of MFRS 9.

• Recall that the group has guided for an early assessment impact of an increase in provisions by 20-25% with the adoption of MFRS 9. This is on the condition that its regulatory reserves be allowed to partially offset against the higher provisions required under the new standard. As for now, the ability of banks to utilise their regulatory reserves to offset against the higher provisions under MFRS 9 is still uncertain. The group will only be implementing MFRS 9 in FY19 (starting 1 July 2018). This is due to its financial year-end in June. It is still unable to provide guidance for its run-rate of credit cost post-MFRS 9 adoption.

• The group's liquidity continued to be ample based on an LD ratio of 80.6% against the industry's 89.8% as at June 2017. Also, its liquidity coverage ratio (LCR) and NSFR were both above 100.0%. These ratios were higher than the minimum regulatory requirement of 100.0%.

• The group's loan approvals and pipeline deals are still decent. It still has a healthy pipeline of mortgage loans. We continue to expect the group's loans to grow modestly in line with the broader industry trend. We have imputed a loan growth assumption of 6.0% into our forecast for FY18.

• GIL ratio has been trending upwards in the last 4 quarters, rising from 0.79% in 4QFY16 to 0.96% in 4QFY17. This was contributed by impairments of mortgage loans taken by borrowers in the vulnerable income segment as well as corporate loans. 4QFY17 saw upticks in impaired loans coming from mortgage loans, three oil & gas sector loans and a loan extended to the shipping sector which was well collateralised. We gather that 86.6% of the group's loans are collateralised. This largely explains why the group's credit cost is still low despite upticks in loan impairments. For 1QFY18, we expect the group's GIL ratio be stable and stay below 1.0%, which is still well below the industry's 1.7%. On FY18 credit cost, we maintain our assumption of 0.13% for now.

• The group's NOII is expected to be supported by the income from wealth management largely from bancassurance and sale of structured products. This is expected to offset the subdued FX income as a result of lower volatility in currencies. Meanwhile, challenges continue to be seen in its credit card business.

• Bank of Chengdu's (BOC) provisions have been gradually improving while its loan growth rate has been around the mid-single digit.

• It plans to establish 150 community branches and 5 to 6 flagship branches in the next 2 to 3 years.

• We maintain our forecast. Retain our HOLD recommendation on Hong Leong Bank with an unchanged fair value of RM15.00/share (1.3x P/BV). We continue to see the stock as fairly valued with the share price now trading at 1.4x FY18F BV/share. The re-rating catalyst will be a stronger-than-expected NOII and share profit from BOC.

Source: AmInvest Research - 6 Oct 2017